An extremist, not a fanatic

July 06, 2011

The dark side of competition

The News of the World scandal shows that competition has a downside. Glenn Mulcaire says:

Working for the News of the World was never easy. There was relentless pressure. There was a constant demand for results.

This pressure, though, did not come merely from his bosses. It came from market forces. The News of the World operates in a very competitive marketplace and this competition created a demand to get stories.The standard reply here is that, as someone once said, markets need morals. Competition can only be satisfactory if it operates within ethical guidelines.But morality is endogenous. In some cases strong competition will lead to bad behaviour, simply because people will sometimes think the benefits it - getting the story, keeping one’s job - outweigh the costs, the risk of getting caught. (The fact that Mr Mulcaire's assessment of the costs and benefits seems, a few years later, to have been mistaken is relevant only in hindsight.)This is not the only example of competition having a downside. To take just two things I’ve read today, John Kay describes how competition leads to infuriatingly opaque pricing by airlines and phone companies. And this paper - based on a study of classical composers - shows that:

Competition incorporates a large negative externality in terms of a decreased state of health and premature death.

If I were a bog-standard lefty I’d add to this list and say that it all shows how the “neoliberal” emphasis on market forces destroys lives and moral standards. But I’m not. The history of centrally planned economies, surely, shows us that the absence of competition does not mean an absence of incentives to misbehave. Given its offsetting benefits, competition is necessary even in a socialist society. In fact, I suspect that something like the News of the World scandal might have happened even if the paper were run as a socialist co-op. After all, the motive that led to phone hacking was an instinct which all good journalists should have - the desire to get a story which people want to read; the fact that the News of the World is a right-wing rag controlled by evil capitalists and the fact of its misbehaviour might not be perfectly related to each other.Instead, my point is directed at those who often - and often rightly - praise the virtues of competition. Such folk - yes Mr Worstall, I mean you - love to tell us there ain’t no such thing as a free lunch. They’re more right than they know. Competition ain’t a free lunch either.

"Given its offsetting benefits, competition is necessary even in a socialist society. In fact, I suspect that something like the News of the World scandal might have happened even if the paper were run as a socialist co-op. "

There are no answers in economics: only trade offs.

"What else is a Pareto improvement other than a free lunch?"

To be more acurate, and a point I have made a number of times, there are free lunches but the important point about them is their rarity.

@botogol: precisely right. Its entirely down to the readers. If they walk away in droves and don't go back, the NOTW goes bust. Simple as that. If some of the readers stop buying for a while but slowly return, then they have tacitly approved of the moral actions of the journalists who produce it.

Papers, and the actions of the journalists therein, are entirely the products of the moral stances of their readers.

If the NOTW is still in business in a years time, blame the people buying it.

@Neil - yep. That's exactly what I feel. Been Murdoch's strategy when building his empire - is hardly likely to change tack now. I do feel the boycott is slightly incoherent. Reuters reported on the 5th that Ford was pulling its ads from NOTW and would be transferring its spending to other parts of News International. Hardly kissing Murdoch goodbye: